Local firms assess Lehman fallout

Banks, insurance companies, other institutional investors could have aggregate exposure of $250 million to $300m.

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While Wall Street woke up Monday to the collapse of Lehman Brothers Holdings, Israeli banks and financial institutions will also have to assess their exposure to the financial meltdown, according to local financial analysts.
"Local banks' exposure to Lehman Brothers Inc., which is estimated at a few hundred million dollars, is not a major story when compared with other global banks," Terence Klingman, senior analyst at Excellence Nessuah Investment House, told The Jerusalem Post on Monday. "Bank Hapoalim will have to make write-offs, but they will not have a dramatic effect on the bank's financial stability.
"In our opinion, in a few days Bank Hapoalim will have to cut its profit guidance, and it could report a small loss on regular activity in 2008, even if it posts profits for the next two quarters."
Bank Hapoalim, which took the biggest write-down on subprime-linked holdings of any Israeli bank, is expected to announce shortly that it will not meet its 2 percent to 4% full-year return for 2008 on equity guidance from normal operations, Klingman said.
Monday morning, Lehman Brothers announced that it was filing for Chapter 11 bankruptcy protection after attempts to rescue the 158-year-old firm had failed.
Monday afternoon, Bank Hapoalim disclosed to the Tel Aviv Stock Exchange that it had an exposure of $109 million linked to Lehman Brothers Holdings.
The bank's exposure to Lehman Brothers products includes $44m. in bonds due to mature in 2009-2010 and $40m. in credit default swaps (CDS) against Lehman Brothers debt that mature September 20, which the bank hedged with $25m. in March. Hapoalim's net exposure to Lehman Brothers CDS products amounts to $15m., which was reduced from $160m. in recent months. In addition, Hapoalim reported that its share of derivatives known as first to default basket, which will mature in 2009-2011, amounts to $50m.
"The ongoing credit crisis will likely continue to pressure Bank Hapoalim's residual-structured credit exposure," Klingman said. "While none of these exposures is large enough to severely dent the bank's capital position, further write-downs could still have a material impact on quarterly profits, including write-offs due to exposure to Lehman Brothers Holdings."
Israeli financial institutions, including banks, insurance companies and other institutional investors, have an aggregate exposure to Lehman Brothers Holdings of $250m. to $300m., according to market estimates.
In the Israeli market, Lehman Brothers is a major player in the structured-products market and options market. Local exposure to the embattled investment bank relates to investment in Lehman stock or bonds, holdings in structured instruments that it issued, fixed-income securities, credit default swaps and credit derivatives linked to Lehman or derivative transactions connected with it.
As for Bank Leumi, which chose not to disclose its exposure, informed sources estimate an exposure of about $90m. to Lehman Brothers credit.
Bank Leumi's sale of its remaining 2.5% stake in Cellcom for an estimated capital gain of NIS 90m., which was reported on Sunday, was intended to offset expected write-offs from exposure to Lehman Brothers, Klingman said.
"In our view, the sale of the stake is intended to buffer third-quarter results in 2008 against write-offs on structured-credit exposure, as well as possible write-offs related to exposure to Lehman Brothers," he said. "Bank Leumi is probably also feeling the effect of a tougher operating environment and, unlike Bank Hapoalim, has not made substantial cuts in head-count, so it cannot rely on cost savings to boost the bottom line.
"The bank's large portfolio of non-bank holdings provides it with ample sources to smooth out volatility in core-banking earnings. Nevertheless, as the credit crunch deepens, it will become more difficult to secure top dollar for its larger stakes, including the 15% holding in Paz Oil due to be sold in 2009 under a Bank of Israel directive," Klingman said.
The local economy was well-positioned to cope with the damage to the global economy from the latest financial crisis, the Finance Ministry said Monday.

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